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Friday, August 15, 2014

Arbitration Agitation

O’Rourke et al. were the Plaintiffs. Mr. Lunde was the Defendant. Normally I like to use names, but it’s going to get confusing, so I’m going to use Plaintiff and Defendant.

Plaintiffs and Defendant were partners in a partnership (obviously) that owned and operated an apartment building for senior citizens in Morrisville. Defendant was a general partner and Plaintiffs—there were multiple people—were limited partners. The partnership term was for 30 years. After 30 years, the partnership was to be dissolved and the general partner was supposed to liquidate the assets, quickly and get a good price. Then Defendant would get 50% of the proceeds, and the limited partners would get the remaining 50% split between them. In the event of a dispute about dissolution, they had to arbitrate. The partnership agreement was made in 1979.

2009 rolls around and Defendant didn’t liquidate the assets like he was supposed to do under the agreement. By 2011 the limited partners had had enough waiting, and filed in superior court to ask that the court appoint a receiver for the purposes of winding up the partnership. Initially, Defendant was allowed to stay on, doing the day-to-day work, but after a few months he was removed because he wasn’t cooperating.

So, they all go to arbitration. Well, the Plaintiffs go. Defendant skips the arbitration saying he had a medical problem, but never provided proof of it. In any case, the arbitration went forward. The arbitrator determined the shares each party would get, and surcharged Defendant with costs for the receivership, arbitration costs, and attorney fees. The arbitrator couldn’t determine the exact amounts of the attorney fees because some had already been paid, and some were still pending. But the arbitrator found that all the fees could have been avoided altogether if Defendant had just wound up the partnership like he was supposed to a few years before. The arbitrator issued the award in January 2013.

Plaintiffs filed the arbitration decision with the superior court and asked that it be confirmed. The court accepted it on February 12, 2013 and told the Plaintiffs to file a confirmation order.

On February 22, 2013, Defendant filed what he called a “Notice of Appeal” but was actually a motion to vacate the order. That got denied on May 22, 2013, because the court thought it was untimely under the Vermont Arbitration Act (VAA). The court thought Defendant should have filed within 30 days of Defendant receiving a copy of the award. Defendant hired a lawyer and filed again, and again that was denied. The court confirmed the order and added some more Plaintiff attorney fees.

Defendant appeals.

SCOV first says the appeal was timely. The statute on arbitration says that a litigant may appeal an award prior to the entry of final judgment. The rule about “may” is that it means it could happen or not, but it isn’t mandatory. Here, Defendant could have appealed the arbitration order before the court issued the final judgment, but it wasn’t required. He waited until the judgment was final, and the Court says that was okay.

Plaintiffs felt that Defendant shouldn’t be able to appeal at all, because the partnership agreement said they’d agree the arbitration was final.

SCOV says no to this, too. In fact, SCOV says that a clause like this might not even be enforceable. If parties entering into an arbitration clause means that there can be no appellate review, it had better say it clearly and up front. The arbitration clause in the 1979 agreement doesn’t say that.

Defendant raised many claims on appeal, and Plaintiffs said that he pretty much is out of luck because he didn’t raise the issues in the trial court.

SCOV says that some are reserved, and some aren’t. Defendant always opposed the appointment of a receiver, because he said he was working to liquidate the assets as he was required to do. There was a question about whether the superior court even had jurisdiction to appoint a receiver, since there was an arbitration clause requiring that the parties arbitrate any disputes.

SCOV gives us a nice lesson in receivership. A receiver is someone appointed by the court to take possession of and preserve property in litigation. It’s a pretty extraordinary step for the court to appoint a receiver. SCOV thought it was appropriate that it was the court that did this and not the arbitrator. First, the arbitration clause wasn’t broad enough to allow that. Second, although some states allow that through arbitration, Vermont isn’t one of them. If there is an arbitration clause, but also if there is a remedy that can’t be granted by the arbitrator, the parties always have the ability to turn to the court.

There was also a timeliness issue for Defendant’s motion to vacate. Turns out the contract here predated the Vermont Arbitration Act by 6 years, so that act doesn’t apply to the contract. A different law with a longer timeline applies, so as it turns out, the motion was timely. But SCOV says it was harmless in the long run because there wasn’t a basis for relief.

Finally (whew), there’s an issue about attorney’s fees. Vermont follows the “American Rule.” The American Rule is that each party bears his own attorney fees. The partnership agreement didn’t specify that fees could be shifted. In the dissolution of a partnership, fees can be shifted only in the case of dissociation of a partner who takes actions “arbitrarily, vexatiously or not in good faith.” A court can award fees, but it must be done “with cautious restraint.” My favorite parts of this opinion are the words “vexatiously” and the phrase, “with cautious restraint.” Maybe if I’m ever in an all-girl garage punk band we’ll call ourselves “Vexatiously.” Or “With Cautious Restraint,” if we’re feeling ironic.

Anyway, back on track with this case. The arbitrator specifically did not find that Defendant acted in bad faith. In fact, he found that the problems with winding up the partnership may have been attributed to Defendant’s health. However, because the arbitration clause was pretty broad, the arbitrator could allocate costs associated with resolving the dispute. That meant that the arbitrator and other professionals involved in the dispute could get paid, and that the arbitrator could figure out who should pay what. The arbitrator left the amounts to the court to determine.

So, the award was created and then sent to the trial court to review and confirm. SCOV says this is okay, and that the arbitrator acted within the scope of what he was allowed to do.

The only issue that got remanded was an accounting issue. It looked to SCOV like a legal bill for about $53,000 was actually charged twice to Defendant. So that goes back for a review, but that’s it.

What did we learn here? I guess—make your arbitration agreements clear, that some powers are reserved only for the court, that timeliness depends on what statute governs, and to double-check your math.